Growth Story Underpinnings of Acquisition Financing

Posted on: September 20th, 2023

acquisition-financing

At their core, all acquisition financing deals have a big idea, something transformational that will transmute a lowly asset into high valued form. This is also commonly called the growth story and it is a well-trodden path of independent sponsors with special skills be they operational, business development or diversification. Often the sponsors ability to articulate their growth story exceeds their ability to deliver the growth.

Nonetheless, growth story articulation is the key element to generating interest from an acquisition financing lender in the first place. The ability to develop and deliver the growth story often is the difference between hooking the interest of the acquisition financing or not. Acquisition financing lenders are constantly bombarded with deals with widely varied levels of presentation quality. Sometimes the presentation is extremely well produced with clear and understandable description. Sometimes the deal looks as if it was prepared by a rookie with little attention to substance and presentation quality. Time is the most important resource an acquisition financing lender has. They do not waste their time on deals that are minimally described in lackluster presentation formats. It does not matter how strong is or how stellar the financial performance has been.

If the sponsor does not take the time to frame out the growth story in a manner that is relatable, quantifiable, and credible, the acquisition financing lender will likely take a pass on the deal. Acquisition financing lenders like highly detailed presentations that map out the steps in the growth journey. The proper level of detail in the growth story suggests to the lender that the sponsor is aware of and prepared to manage the market and operational complexities inherent in the growth plan. When the growth story is strong, it is a prism of understanding for the acquisition financing lender, and results in a higher probability of lender attraction. When presented properly, the lender will immediately be able to get a handle on the risk of the acquisition and quickly decide if the deal works for them.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.